Pricing system for commodities, livestock sought

RED DEER — A made-in-Canada price reporting system is needed for agriculture commodities, says Iebeling Kaastra, research director with Gibson Capital Inc.

“Typically prices are not public information. You have to be a customer or a grain company to get prices, or you have to have a cash broker,” Kaastra told a recent Alberta Agricultural Economics Association meeting in Red Deer.

Canadians often rely on American prices for grain and livestock, but true price discovery is often elusive.

The United States has a mandatory price reporting law that requires packers to disclose price and volume information for cattle, hogs and lamb. No such law exists in Canada, and all price reporting is voluntary, which reduces the quantity and quality of public price information.

Hogs are based on a U.S. cash price reported through the U.S. Department of Agriculture’s marketing service, which gathers data and prepares price reports. However, few U.S. hogs actually trade on the cash market.

“There is no independent basis in the hog market in Western Canada,” he said.

Canada’s cattle industry also relies on U.S. pricing mechanisms, and price discovery fell apart when BSE hit in 2003 and international borders closed.

Auction markets can provide some price information on various classes of cattle. Canfax, the Canadian Cattlemen’s Association’s market information division, also surveys its feedlot members to determine the price of fed cattle on a particular day.

However, the prices are provided voluntarily and the cash trade could be as low as 20 percent of transactions. The rest are under a contract or formula, said market analyst Brian Perillat.

“A lot of the simple cash trade deals that are done every day of the week or on significant volumes just are not there,” Perillat said.

A variety of formulas are used on cattle pricing and may not be clear until the animal is processed and settlement is made.

Statistics Canada collects prices, which on a broad picture basis are useful as an historical overview. They are collected from surveys and others sources and are published quarterly in the Farm Product Price Index.

“A big part of market information is timeliness,” Perillat said.

Grains, oilseeds and special crop trades are also hard to track, said Kaastra.

“It always amazes me these special crops can operate in the environment they do with no pricing instruments to speak of,” he said.

“There are a lot of transactions happening in the marketplace, and from the grain companies’ point of view it is classified,” he said.

The wheat market in Canada is tied to the three U.S. futures markets. ICE Futures Canada has listed durum and milling wheat futures specific to Canada, but these contracts are inactive.

Milling wheat, durum and feed wheat have been tied directly to the global price since the CWB monopoly ended. Price discovery in wheat is limited to cash brokers, bids from grain companies and producer associations that post prices on their websites.

Kaastra proposes an independent agency to collect and publish prices, but government funding isn’t available to set up such an agency.

“The trickier part is where you can get the data from,” he said.

As well, Canada lacks critical mass in many commodities, so it is hard to get good price information.

“If you don’t get critical mass, people don’t want to get involved,” he said.

A price reporting agency would benefit producers, processors, bankers and provincial crop insurance. He suggested partnerships and co-operation between farmer organizations, government and private companies to develop price indices to better settle existing crop revenue insurance contracts and launch new risk management products.

The oil and gas industry has a price discovery system that was poorly received when it first started.

“Now some of the biggest companies are their clients. They have contracts based on the price information they have developed,” he said.